The Energy Act 2016

The Energy Bill received Royal Assent on Thursday 12 May 2016. Following publication of the Strategy for Maximising Economic Recovery of Offshore UK Petroleum (the “Strategy”) on 18 March 2016 (see our Law Now here) the oil and gas industry now has the key building blocks identified by the Wood Review as essential for achieving MER in the UKCS.

The Energy Act 2016 covers three important areas of change:

• Establishing the OGA Although established on 1 April 2015 as an Executive Agency of DECC, the OGA has now formally gained its status as an independent Government Company under the Energy Act 2016.

• Setting out the OGA’s formal powers The OGA has also now acquired the formal enforcement obligations and powers set out in the Energy Act 2016, implementing key recommendations from the Wood Review.

• Onshore wind Onshore wind has been an area of much contention in the Ping Pong phase of the passage of the Energy Bill as commented on in a previous Law Now. The passing of the bill into law confirms that the Renewables Obligation is now closed to onshore wind and the relevant grace periods are in effect.

MER UK Strategy (the “Strategy”)

The Energy Act 2016 (“the Act”) formally establishes the Oil and Gas Authority (“OGA”) as an independent Government Company, with the intention that it will be as fully independent a regulator as is possible. The Act sets out the key criteria to which the OGA must have regard in the operation of its functions as regulator, and gives the OGA its powers to enforce the Act and the Strategy on the industry stakeholders to whom it applies, including licensees, operators, upstream infrastructure owners, and those commissioning infrastructure (“relevant persons”). The Central Obligation of the Strategy is that “relevant persons must, in the exercise of their relevant functions, take the steps necessary to secure that the maximum value or economically recoverable petroleum is recovered from the strata beneath relevant UK waters”.

As the UKCS is a mature basin with a high cost base, all stakeholders under the Strategy are required to consider whether collaboration would reduce costs or increase recovery. Although cooperation in the oil and gas industry is not a new concept, the emphasis placed on it in the new regulatory regime will give rise to potential competition law risks that the OGA and industry stakeholders will need to navigate.

The Principal Objective & Government Support

The Principal Objective (originally enacted via the Infrastructure Act 2015), central to the Act and underlying the Strategy, remains unchanged as being the objective of maximising the economic recovery of UK petroleum. (CMS commented on the attempted amendment by the Lords of the Principal Objective in a previous Law Now.)

The OGA has indicated it will adopt a tripartite approach in seeking to achieve the Principal Objective:

1. Regulating oil and gas, and carbon storage;
2. Influencing industry culture, commercial behaviour, and promoting collaboration; and
3. Promoting investment in the UKCS, creating value, and developing the industry.

In support of the Principal Objective, the OGA Corporate Plan 2016-2021 has a focus on revitalising exploration, driving development and infrastructure, and ensuring the right technology and regulatory conditions are in place to support this. Citing the example of the UK Government’s 2015 £20m Seismic Acquisition Program, the OGA is keen to stimulate more accessible data and in turn encourage exploration that will promote the Principal Objective and the Central Obligation . The OGA has indicated that plans will be published to support the changes that are underway and provide the industry with a detailed picture of what the OGA now expects from it.

Government support for the future of the UKCS can be seen in the establishment of the OGA and in the changes made to the fiscal regime in March’s Budget, reflecting the current economic climate faced in the industry. Maintaining a stable tax environment with stronger governance from the OGA and increased collaboration in the industry could be the key to a sustainable UKCS, at least in the mid-term.

OGA Powers

The OGA will have extensive powers to assist its regulation of oil and gas recovery in the UKCS. In exercising its new powers, the OGA must have regard to multiple factors, set out in section 8 of the Energy Act:

• Minimising future public expenditure;
• Security of supply;
• Storage of carbon dioxide;
• Collaboration;
• Innovation; and
• Ensuring a stable system of regulation.

The most significant new powers that will directly impact relevant persons include:

• Access to Information and Disclosure Under section 34 of the Energy Act, the OGA has the power to make a written request for petroleum-related information or samples that are relevant to the OGA functions and carrying out the Principal Objective. This will give the OGA access to a broad range of information and samples, with almost all activities in the UKCS arguably being relevant. An information and samples coordinator must be appointed by each relevant person, and their details notified to the OGA. The OGA’s requests cannot extend to any information that is subject to legal privilege and the coordinator should play close attention to the status of their data. If relevant persons do not comply with any of these requirements, they could be subject to sanctions under Chapter 5. Under Chapter 6, the OGA is not permitted to disclose any protected material – the information or samples requested and obtained – except to other branches of government and regulators, and certain other bodies. Recipients can only use information that is relevant to their functions and only to the extent necessary to carry out their functions. This may have been intended to give stakeholders a level of comfort when providing information to the OGA that commercially sensitive information will not be widely shared beyond the OGA, but there is still scope for considerable transfer of that information across government. Information will also be potentially subject to Freedom of Information Act requests.

• Meetings If a relevant person has a meeting with one or more other relevant persons and/or the meeting involves a discussion relevant to the Principal Objective or activities under a licence, the OGA must be notified of the meeting in writing with sufficient details and, where reasonably practicable, with more than 14 days’ notice. A written summary of the meeting and any decisions must also be provided to the OGA within a reasonable period after the meeting. The meeting requirements, under Chapter 4, will evidently cover a significant number of industry meetings. Since the OGA may impose sanctions for non-compliance, there may be a risk that this requirement could lead to increased attempts to convene meetings as legally privileged meetings or deter relevant persons from discussions which could have been beneficial. These requirements also have the potential to place a considerable administrative burden on the OGA but, since the OGA does not have limitless resources, it is anticipated that it will require notification only in a subset of cases, either by reference to pre-defined categories of meetings or where it has expressed a specific interest.

• Sanctions The Wood Review recommended the introduction of a gradated sanctions regime, to allow the new regulator flexibility in addressing any failings it identified. The OGA now has a range of options open to it in the event of breach of a “petroleum related requirement”, such as a failure to follow the Strategy or a breach of licence. These include enforcement notices, financial penalty notices, removal of operators and revocation of licences. There will be a right of appeal to the First Tier Tribunal where sanctions are imposed. Finding a fair balance between sanctions and rewards is likely to be central to the successful application of the Strategy. Under the Act, the OGA is required to consult and issue guidance on what it will consider when deciding on a financial penalty amount. That process is currently expected to be completed by around July 2016. The OGA has indicated that its intention is to have a sanctions regime that is transparent, consistent and targeted and has already started the process of working with industry to try to ensure that is the case.

• Dispute Resolution New non-binding dispute resolution powers will allow the OGA to either decide to act on its own initiative, or to have a dispute referred to it by a relevant party. Before it decides to act on its own initiative, it will first request information on the dispute and consider whether it is appropriate for it to intervene. If a dispute is referred to it, the OGA has discretion as to whether or not to accept the reference, and will consider matters such as the significance of the dispute in deciding whether to take it further. If the OGA does decide to act in either scenario, it will issue a timetable and request further information or meetings; failure to comply will risk the imposition of sanctions. After consideration, the OGA will then issue a non-binding recommendation. In making a recommendation, the Strategy will be looked to for guidance and the OGA will have to take account of the factors set out in section 8 of the Act. Again, in practice, the OGA is unlikely to have sufficient resources to get involved in every dispute that arises and the OGA has indicated it is likely to consider a dispute only if there is significant value at risk or important project timescales are under threat. Although the OGA has stated that it will not directly intervene in existing commercial arrangements, it remains to be seen in practice what impact a non-binding recommendation from the OGA may have on such arrangements.

• Decommissioning The Secretary of State must approve an abandonment programme before any decommissioning of an installation or pipeline is begun under Part 4 of the Petroleum Act 1998. Schedule 2 of the Energy Act amends the Petroleum Act 1998 to require relevant persons to consult the OGA before submitting an abandonment programme to the Secretary of State, and to require the Secretary of State to consider representations from the OGA when deciding whether to approve a programme. The Secretary of State may impose conditions or require amendments to programmes in order to reduce costs, particularly as regards timing and collaboration. Alternatives to decommissioning, such as re-use or preservation, must be considered by the OGA. There are a number of issues that may consequently arise in practice - for example, how this would operate where the OGA sees benefit in preserving an asset.

Early closure of Renewables Obligation for onshore wind in England, Wales and Scotland

The date from when the Renewables Obligation would close for onshore wind projects has been the chief cause of delay in getting the Energy Bill into law. On achieving Royal Assent, the Energy Act 2016 marks the closure of the Renewables Obligation to onshore wind projects as of 12 May 2016. The grace periods have also been confirmed with the deadline for a generator having secured its planning permission, grid connection and land rights remaining at 18 June 2015 but a month’s additional grace period now applying in the case of grace periods relating to grid or radar delays or subject to the investment freezing condition.

The position in relation to onshore wind in Northern Ireland remains largely unchanged and as outlined in our previous Law Now.

Comment

The OGA’s performance will be reviewed on a three yearly cycle, giving it a reasonable period to establish itself before first coming under scrutiny. It will take some time for the OGA to settle into its new role and flex its new muscles. Undoubtedly, any sanctions applied in the coming years will be closely considered by the industry to try to understand what precisely is expected by its new regulator. Detailed guidance from the OGA is anticipated in a number of areas and should assist the industry in adapting to the OGA’s new requirements for those operating in the UKCS.

Arguably the most difficult challenge for the industry will be adapting to a collaborative, cooperative climate. That may involve key players in the industry taking perhaps a broader view of outcomes rather than a simple focus on only their own corporate interests. Behaviours can be notoriously difficult to change, but the industry is under pressure and appears to recognise that some change is required – with its new status and powers, it may be that the OGA has the weight behind it to create a lasting shift.

While the onshore wind industry in England, Wales and Scotland may have wished the House of Lords to succeed in extending the deadlines by which onshore wind projects had to secure planning, grid and land rights in order to be eligible for certain grace periods, and the messages to the renewables industry from the Government continue to be fairly mixed, at least on this front there is now certainty.